Two sides of the DOL fiduciary rule’s ‘Best Interest Contract Exemption’ advisers must understand

The Best Interest Contract Exemption is one of the main pillars of the Labor Department’s fiduciary rule.
Without it, many brokers and advisers wouldn’t be able to continue doing business in retirement accounts under current business practices and compensation arrangements. But with it, there is a way forward (albeit with more compliance requirements and litigation risk).
However, there is a sort of duality to the exemption that will dictate how firms can forge ahead: what has become known generally in the industry as BICE versus “BICE Lite,” each with its own specific requirements and trade-offs.
Generally, BICE Lite is thought to expose advisers to less risk and disclosure requirements, but is fairly narrow in its application compared to BICE.
“There’s a huge difference between BICE Lite and BICE,” said David Levine, principal at Groom Law Group. “If ever possible, you’d almost always want to be in BICE Lite.”
BICE EXPLAINED
Here’s why the iterations of BICE are so important: Any adviser providing investment advice for a fee is a fiduciary under the Department of Labor’s regulation. Fiduciaries giving advice resulting in any sort of variable compensation — an adviser getting paid via a commission, or receiving higher fees because of a rollover recommendation, for example — would be engaging in a “prohibited transaction” under ERISA and IRS rules, and assessed penalties.
The BICE is an exemption that allows for variable compensation without triggering penalties, as long as advisers and financial institutions follow certain requirements.

BICE LITE
The BICE Lite is a specific exemption under BICE rules for “level-fee fiduciaries.” The DOL made BICE Lite more “streamlined” than BICE, because it sees the interests of the investor and adviser as “aligned” in a level-fee arrangement.
Level-fee fiduciaries are subject to a few requirements to receive an exemption under BICE Lite, including:
• A written statement of fiduciary status;
• Compliance with standards of impartial conduct (providing advice in an investor’s best interest, receiving reasonable compensation for transactions, and not making materially misleading statements to investors about recommendations);
• Written documentation of the reasons for the recommendation.
BICE Lite will likely have the biggest impact on rollover recommendations, because they’re most likely to fit into conditions of the exemption, said Joan Neri, counsel at Drinker Biddle & Reath.
BICE
The BICE “is more involved” than its Lite counterpart, Ms. Neri said.
The most significant difference is BICE calls for a contract between the financial institution and investor. The contract must, among other things, acknowledge fiduciary status and that advice is in a client’s best interest.

“That has firms very nervous, because now the remedy [for investors] is breach of contract in state court” and exposure to class-action lawsuits, said Jason Roberts, chief executive of the Pension Resource Institute, an ERISA compliance consulting firm.
The contract doesn’t apply to ERISA plans such as 401(k)s, only to IRAs and non-ERISA retirement plans.
There are warranty requirements built into the contract: for example, that financial institutions will have policies and procedures in place to ensure advisers comply with impartial-conduct standards, institutions won’t rely on sales quotas that could lead recommendations not to be in the best interest, and identification of material conflicts of interest, Mr. Levine said.
These are obligations that would need to be carried out from a contractual standpoint, and exposes firms to more liability, Ms. Neri said.
BICE also includes “a mountain of disclosure requirements,” Mr. Levine said.
Those include contract disclosures, point-of-sale disclosures, website disclosures with requirements for quarterly updates, and disclosures necessary for proprietary products and third-party payments, for example.
“That’s why BICE Lite is so great, because it avoids the contract, the disclosures, all these additional pieces,” Ms. Neri said.
Ultimately, hybrid firms with both RIA and brokerage operations can use both BICE and BICE Lite with the same client, through complementary commission and fee portfolios, if it’s deemed to be in a client’s best interest, Mr. Roberts said.
FLEXIBILITY
Although provisions of the BICE may appear more onerous for stakeholders, there is an advantage — it can accommodate a wide range of compensation arrangements. That’s not true of BICE Lite, which is “zero flexibility,” Mr. Roberts said.
To be considered a level-fee fiduciary under BICE Lite, the fee must be level not just for the adviser, but the supervising firm (whether broker-dealer or registered investment adviser) and their affiliates as well. Also, receiving third-party payments of any kind through recommendations disqualifies use of BICE Lite, according to Mr. Roberts.
And the types of third-party payments are numerous — 12b-1 fees; revenue-sharing payments; gross dealer concessions; distribution, solicitation or referral fees; volume-based fees; and fees for seminars and educational programs, for example.
BICE allows for this sort of compensation.
DOCUMENTATION DIFFICULTY
That said, it’s not as if BICE Lite will be a walk in the park for level-fee fiduciaries. Documentation of why a recommendation such as a rollover is in a client’s best interest is the most challenging part of the exemption requirements, attorneys said.
“With this best-interest standard, you really have to establish why it’s prudent and investigate all the relevant factors for that investor,” Ms. Neri said.
This is likely going to be a more involved information collection under the best-interest standard than is currently the case for RIAs, Mr. Roberts said.
The DOL spells out an example in its rule with respect to rollovers from an ERISA plan, such as a 401(k). The DOL says advisers must document considerations of alternatives to rolling over, including leaving money in the plan, if permitted.
“Specifically, the documentation must take into account the fees and expenses associated with both the plan and the IRA; whether the employer pays for some or all of the plan’s administrative expenses; and the different levels of services and different investments available under each option,” according to the rule’s text.
“If they can’t handle the analysis on the client’s current situation, then they won’t be able to recommend a rollover,” said Daniel Bernstein, chief compliance counsel at MarketCounsel, a regulatory compliance consulting firm.
It will probably be tougher for retail advisers than retirement plan advisers to perform these sorts of analyses, because they may not have the experience to easily decipher a plan document for nuanced fee information, Mr. Roberts said.